NZ endowment funds risk/return rethink

Over half of NZ’s endowment funds are weighing up new investment strategies as an era of lower returns and heightened risk looms, according to a just-released Mercer report.

The Mercer survey of trustees in 28 NZ endowment funds – including community trusts and the like – found 54 per cent were considering changing their investment objectives even while most (about two-thirds) plan to hold spending steady.

About a quarter of respondents said they were expecting to lift their target return rate, Mercer head of institutional wealth, Russell Garrett, said in a release.

“It’s not unexpected to see changes at a time when future market returns are anticipated to be lower than in the past,” Garrett said, “but it is surprising to see some endowments and foundations lift their target return.”

How endowment funds intend to maintain or raise investment returns remains unclear, though, with just 7 per cent of those surveyed currently allocating to alterative assets.

Garrett said the NZ sector’s exposure to alternatives was low by global standards with average Australian and small US endowment funds, for example, typically allocating 11 per cent to the asset class. Large US funds in the category can invest more than half into alternative assets, he said.

“Alternative asset classes can provide exposures to different risk and return drivers than listed markets, leading to improved portfolio diversification,” Garrett said. “We believe all endowments and foundations should consider a judicious increase in exposure to alternatives.”

The Mercer report also found just under 20 per cent of respondents had initiated environmental, social and governance (ESG) policies while 12 per cent cited geopolitical risks as a danger – the first time the factor has appeared as a trustee concern in the six years Mercer has run the survey.

While endowment and foundation trustees are currently exempt from the managed investment scheme (MIS) rules that apply to, for instance, employer superannuation funds, Mercer says tougher governance standards could be on the way.

The report says endowment/foundation fund trustees should “look at what has happened in the [MIS] space” for guidance.

“Regulation has compelled [MIS] trustees to lift their game and it would be better to address these issues in advance of any further government legislation,” the Mercer survey says.

The survey covered 28 funds in the sector, ranging in size from $7 million to $1.9 billion.

Endowment funds, such as the $1.9 billion Foundation North (formerly the ASB Community Trust), typically aim to generate annual income to support charitable causes or organisational goals while preserving capital.